Balancing Investor Protection and Insolvency Goals: A Critical Analysis of SEBI Delisting Guidelines Under IBC
Anmol Jain
3rd Year, B.Com. LL.B. (Hons.), Nirma University
Introduction
One of the primary objectives of the Securities and Exchange Board of India (hereinafter referred to as “SEBI”) is the protection of investors in the current securities market. It entails safeguarding investors’ interests by offering advice and making sure the investment is secure. A listed firm seeking voluntary delisting must get approval by a special resolution, where at least two-thirds of the votes cast by public shareholders support the motion, according to Regulation 3(2)(b)(i) of the SEBI (Delisting of Equity Shares) Regulations, 2021. Throughout the delisting process, this clause protects the interests of public shareholders and guarantees transparency. According to the Insolvency and Bankruptcy Code 2016 (IBC), firms are excluded from the Corporate Insolvency Resolution Process (CIRP). The need for public shareholder approval is removed if delisting is a component of a resolution plan that has been authorized by the Adjudicating Authority (NCLT). This aligns delisting with insolvency goals and facilitates a resolution that is in the best interests of stakeholders.
Constitutional Validity of the SEBI Guidelines
Recently, the Bombay High Court, in its judgment of Investor Protection v. Regulatory Balance, adjudicated upon the constitutionality of SEBI’s Delisting Regulations under IBC. The court in its judgment held that the Delisting Regulations shall not apply to the delisting of a listed company made pursuant to the resolution plan approved under Section 31 of the IBC, if such plan provides for the delisting of such shares or an exit opportunity to existing public shareholders at a specified price, states the contested regulation, namely Section 3(2)(b)(i). The court noted that there is nothing in the goals of the SCRA (Securities Contracts (Regulation) Act),1956) and SEBI Acts or any of their specific provisions that would imply that granting such an exemption would go beyond the authority granted to the SEBI by the two laws, which are designed to regulate the securities market and the issues related to or incidental to it. The court also noted that by maximizing the value of the corporate debtor’s assets and quickly resolving the bankruptcy, the IBC offers enough protections to defend the interests of the stakeholders. Legislative or quasi-legislative authorities determine the amount of this protection, which is a policy subject where the court has little influence. The court also said that the SEBI has acknowledged the relative positions of the SEBI Act and the IBC by creating the contested regulations. According to Section 32 of the SEBI Act, its provisions are meant to supplement, not to negate, the requirements of any other already enacted laws. Furthermore, it is assumed that the SEBI Act, a previous law, was taken into consideration by the IBC, a later law. When the Delisting Regulations of 2021 take into account the relative positions of the IBC and SEBI Act and stipulate that the Delisting Regulations shall not apply to delisting pursuant to a resolution plan approved under the IBC, the bench noted that the doctrine of ultra-vires would not be attracted. The court further noted that the IBC’s provisions shall take precedence over any other laws and documents that fall within its purview. The Court also ruled that when it comes to approving a resolution plan, the CoC’s business acumen must be given some weight. The court stated that the Explanation to clause 30(2)(e) states that if shareholder approval is needed under the Companies Act, 2013 or any other currently enacted law for the implementation of actions under the resolution plan, it will be considered granted and will not be a violation of that Act or law. The court noted that “the full effect must be given to the legal fiction created by the legislature, and such effect must not be cut down or diluted by applying the delisting regulations to a delisting per a resolution plan approved under Section 31 of the IBC.”
Exit Plan for Investors
One of the grounds on which the court held the SEBI guidelines to be constitutional valid, was the guidelines provides the investors with an exit option in case the Company is ordered to be delisted in the resolution plan by the Resolution Professional (RP). The investors are provided with an option for selling off the shares of the delisted company at a price not less than the liquidation value. In practice, however, given the financial status of most firms undergoing the CIRP, the liquidation value for equity owners might be nil, thus the exit opportunity may not signify anything for them. In DHFL’s CIRP, the company’s paid-up share capital was completely reduced, and at no additional expense. The Supreme Court even authorized the resolution plan in Jaypee Kensington Boulevard v. NBCC (India) Limited, (2021) ibclaw.in 63 SC which called for a total reduction of the paid-up share capital at a low cost. The public’s investments are not taken into account by such a resolution strategy, and they often lose everything in these situations. According to SEBI, this kind of “unfair treatment” is unacceptable and has to be fixed. Minority shareholders now possess a devalued position under the IBC. They don’t have any representation before the CoC (Committee of Creditors), and their assent is “deemed” to be provided for any conduct. Furthermore, the cascade mechanism provided by the IBC places the ordinary shareholders last. Thus, the only option left with the investors is to sell their shares in the open market, but as highlighted above, this option appears to be a theoretical solution rather than having any practical plausibility, as no investor or buyer would be willing to purchase the shares of an ailing enterprise undergoing CIRP.
Conclusion
The way the SEBI standards and the IBC framework interact demonstrates a careful balancing act between protecting investors and the more general goal of effectively resolving distressed assets. In addition to highlighting the IBC’s leadership in the delisting process, the latest revisions and court rulings also show SEBI’s attempts to protect public shareholders from complete vulnerability. In order to allay the fears of minority investors, SEBI offers an exit option at a price that is at least equal to the liquidation value. However, investors often experience little to no cash recovery due to practical issues including the shares’ reduced marketability during CIRP and their insignificant liquidation value. The Bombay High Court’s constitutional approval of the SEBI recommendations highlights the congruence between legislative goals and regulatory systems, notwithstanding these drawbacks. In financially troubled firms, the IBC’s resolution procedure places a higher priority on asset maximization and a timely settlement, giving shareholders less leeway. Additional improvements are necessary to boost investor trust and guarantee fair treatment of public shareholders, even if the existing system offers a legal basis. Building confidence and engagement in India’s securities market would require bolstering safeguards for minority investors and resolving the exit mechanism’s practical constraints.
